BBA V Sem

Cost and Management Accounting

 Unit I
Introduction to Cost Accounting

Part -1
 Introduction
Accounting is a broad concept.
It mainly concerns three branches.
The three major branches of accounting are Financial Accounting, cost accounting and
management accounting.

Cost accounting is one of the branches of accounting.

The subject has been developed to mitigate the limitation financial accounting originally had.
Limitations of Financial Accounting :
FA does not give clear idea of operating efficiency.
FA does not disclose the Profit/Loss of each department job, process or
contract.
It does not provide useful data to management for cost comparison in relation
to previous years
There is no developed system of standards to measure the efficiency of
organisation.
It does not provide adequate cost information for report to external users.
It is mainly concerned with historical data.
It does not help in fixation of price.
 Cost
Cost : The amount or equivalent paid or charged for something.
In business and accounting, cost is the monetary value that a company has spent in
order to produce something.
From a seller’s point of view, cost is the amount of money that is spent to produce a
good or product.
From a buyer’s point of view the cost of a product is also known as the price.

Definitions
Cost: The term ‘cost’ has to be studied in relation to its purpose and conditions. As per
the definition by the Chartered Institute of Management Accountants (C.I.M.A.), London
‘cost’ is the amount of actual expenditure incurred on a given thing.
Costing has been defined by the Institute of Cost and Works
Accountants, England as: “The technique and process of
ascertaining costs.”

“Costing is the classifying, recording and appropriate

allocation of expenditure for the determination of the costs
of products or services, and for presentation of suitably
arranged data for the purposes of control, and guidance of
management.”

Definition :
The C.I.M.A., London has defined costing as the ascertainment of costs. “It refers to the
techniques and processes of ascertaining costs and studies the principles and rules concerning the
determination of cost of products and services”.
 Cost Accounting:
It is the method of accounting for cost.
The process of recording and accounting for all the elements of cost is called cost
accounting. I.C.M.A. has defined cost accounting as follows: “The process of accounting
for cost from the point at which expenditure is incurred or committed to the establishment
of its ultimate relationship with cost centers and cost units. In its widest usage it embraces
the preparation of statistical data, the application of cost control methods and the
ascertainment of the profitability of activities carried out or planned”.

Cost accounting was born to fulfill the needs of management of manufacturing companies
for a detailed information about the cost.
Cost accounting is a mechanism of accounting by means of which costs of services or
products are ascertained and controlled in a manufacturing firm for different purposes.
 Cost
Accountancy
The term ‘Cost Accountancy’ includes Costing and Cost accounting.
Its purposes are Cost-control and Profitability – ascertainment.
It serves as an essential tool of the management for decision-making.

I.C.M.A., has defined cost accountancy as follows: “The application of costing and cost accounting
principles, methods and techniques to the science, art and practice of cost control and the
ascertainment of profitability. It includes the presentation of information derived there from for the
purpose of managerial decision making”.
Cost is a sacrificed resource to obtain something,
costing is a process of determining costs,
cost accounting is a technique to assist management in establishing various
budgets, standards, etc and
cost accountancy is the practice of costing and cost accounting.
Cost accounting is necessary for the achievement of the following objectives
or purposes:
✔ Cost Ascertainment:
✔ Determining Selling Price:
✔ Measuring and Increasing Efficiency:
✔ Cost Control and Cost Reduction:
✔ Ascertaining Profits:
✔ Cost Management:
✔ Providing Basis for Managerial Decision-Making:
✔ Tenders and Estimates:
✔ Helpful to Government:
Scope of Cost Accounting
Cost
Ascertainment

Scope of Cost Accounting

Cost Cost
Records Control
The cost accounting cycle is a process performed during the accounting period in recording
data, classifying, determining total cost, determining product cost, determining selling price,
controlling cost and decision making.
 ESSENTIALS OF GOOD COST ACCOUNTING SYSTEM

The essentials of good cost accounting system are as follows:

❑ The system adopted should be simple to operate and easy to understand.
❑ The system adopted should be of economical.
❑ The system should facilitate for preparation of the report in time.
❑ The system should facilitate for easy comparison of results.
❑ The system should not misguide the management.
❑ The system should be flexible, so that it should accommodate the changes in the
economy.
 METHODS AND TECHNIQUES OF COST
ACCOUNTING

The methods or types of costing refer to the techniques and processes employed in the ascertainment of costs.

There are different methods of costing for different industries.

The method of costing to be used in a particular concern depends upon the type of manufacturing and nature of
industry.

In addition to the methods of costing, there are certain techniques of costing, which are used along with any of
the method.
These techniques serve the special purpose of managerial control and policy.
Some of the methods of costing are:-
1. Job Costing
2. Contract Costing
3. Batch Costing
4. Process Costing
5. Unit Costing /output costing
6. Operation Costing
7. Operating/ Service Costing
8. Multiple Costing.
Some of the techniques of costing are:-
1. Uniform Costing
2. Standard Costing
3. Marginal Costing
4. Historical Costing
5. Direct Costing
6. Absorption Costing.
✔ Disclosure of profitable and unprofitable activities
✔ Guidance for future production policies
✔ Periodical determination of profit and losses
✔ To find out exact cause of decrease or increase in
profit
✔ Control over material and supplies
✔ Helps management in taking the decisions.
✔ Helps the Government , wage boards trade unions for
price and wage fixation
o It is expensive
o The system is more complex
o Inapplicability
o Not suitable for small organisations
o Depends on Secondary data
o Lack of Uniformity